Maybe Miners will listen? PVG $1.5 billion buy-out? Keep dreaming...
https://business.financialpost.com/2012/05/09/global-miners-finding-new-ways-to-create-value/
Rather than make big acquisitions or build massive projects from the ground up, global mining giants should pursue less glamourous paths to value creation, according to a new report from Merrill Lynch.
These include low capital intensity developments such as those on existing sites, selling off non-core or under-appreciated assets, and leveraged recapitalizations.
Based on recent capex slowdown announcements from BHP Billiton and Rio Tinto, the world’s largest miners may be reaching the same conclusion.
“We think that large greenfield projects are a challenging path to value creation,” Merrill Lynch mining analysts said in a report. “Any small capex overrun and the ‘value’ is gone.”
Project economics are changing dramatically as operating costs come under pressure from factors such as oil prices, labour costs and currency fluctuations. In fact, Merrill found that capital costs have risen as high as US$20,000 per tonne of annual copper production from just US$5,000 a decade ago.
Companies often commit to several billions of dollars in spending to create just a few million dollars of net present value. So why do they do it?
One reason is that by establishing a base of production, miners have the option to spend more brownfield capital to generate higher returns. They may also be bullish on prices, thereby justifying either the near or long-term outcomes.
Another possibility is that they are simply doing what the market expects of them – building and running mines – perhaps fearing that investors will doubt them if a use can’t be found for surplus capital.
Similarly, Merrill sees big ticket M&A with multiple bidders as rather transparent, thereby providing most of the value to target companies rather than acquirers.